The poverty of rationality

Steve Williamson has written a much longer critique of Zombie Economics. It’s a lot more temperate in tone than the blog post I criticised here, and there are some valid points. Nevertheless, the new version exhibits the same fundamental confusion I pointed out last time, trying to claim that rationality assumptions are both important and unfalsifiable.

I’m criticising it again because, in making this mistake, Williamson is not exactly Robinson Crusoe[1]. The same confusion is evident among a great many economists, and even more among proponents of rational choice models in political science and other social sciences. This, despite the fact that the key error was skewered by William Hazlitt nearly two centuries ago, writing on self-love and benevolence.

Before starting, I’ll make a brief, purely mathematical point. Any consistent pattern of choice among objects (of any kind) that we can observe, can be represented as optimization, that is, as the maximization of a function. The classic version of this result was proved by Cantor, who gave us the modern idea of a function as a mapping between sets, and cleared up a lot of the technical puzzles about continuity and so on. Even choices that are inconsistent in various ways can be represented by more general notions of optimization. So, it makes no sense either to claim (as a lot of economists do) that the fact that we can represent action as the maximization of some “objective” function proves anything positive about the way people think or to object (as a lot of non-economists do) to representing choices in terms of optimization. To (ab)use an apposite quote – this isn’t class warfare, it’s math.

Williamson invokes the Cantor result in support of rationality assumptions saying

If the phenomenon can be described, and we can find some regularity in it, then it can also be described as the outcome of rational behavior. Behavior looks random only when one does not have a theory to make sense of it, and explaining it as the result of rational behavior is literally what we mean by “making sense of what we are seeing.

and in response to my criticisms, that I offer

”“ the usual list of complaints, for which there are standard defenses. (i) We can observe economic agents behaving irrationally, so what is all this rational agent stuff about? Answer: If you think you are observing irrational behavior, you just have the wrong model. Think harder.

So far, our disagreement is essentially semantic. Williamson wants to use the term ‘rational’ to describe optimization with respect to any function whatsover. In this includes the kind of behavior displayed by an agent (not necessarily an individual) in a model, any model. So, I can present whatever model I like, and the behavior in it is necessarily rational, and any rational behavior involves optimising something or other. Provided my model exhibits some regularity in the behavior of agents, they must be optimising something – working out what is the kind of problem normally given to sharp grad students.

By contrast, I normally use‘rational’ to refer to the kind of behavior found in the simplest form of the DSGE models: farsighted, and purely egoistic, agents maximizing the expected utility of stochastic consumption streams over time. Most of the time, at least when no-one is challenging them on it, this is the way neoclassical economists use the term themselves.

And this applies to Williamson himself. At the beginning of his defense of modern macro he writes “A second key principle in the post-1970 macroeconomic research program is adherence to optimization – a key organizing principle in all of economics.”

But we’ve already seen that, according to Williamson, any possible behavior involves optimization. That includes the behavior described by Keynesian macro models, not to mention Marxist, institutionalist and even Freudian models. So, this “key principle” is, on Williamson’s account, entirely devoid of content.
In reality of course, Williamson wants to have his cake and eat it. Most of the time he wants to help himself to the strong implications of rationality as represented in standard micro texts, and to demand that macro be built on this basis. But, when this model is challenged on empirical grounds, he retreats to a concept of rationality that is tautologically true. This is a classic example of John H’s “two-step of terrific triviality”.

To quote my own favorite bon mot on this

most rational actor models assume that “rationality” can be represented as “maximization of self-interest”. This assumption is either false or vacuous. Those committed to egoistic rationality tend, when challenged, to oscillate between the two definitions, in much the manner of the function sin (1/x) as x approaches zero.’

The one appeal to empirical evidence in his entire defence of modern macro is, unsurprisingly, the observation that the Keynesian models of the 1960s ran into big problems and that, at least arguably, this reflected the fact that they failed to take adequate account of the way in which workers and firms would rationally respond to higher inflation. Of course, I described that process in Zombie Economics and went on to show how the demand for rational microfoundations led to DSGE macro which failed in its turn. It’s in responding to this failure that Williamson relies on the non-falsifiability of his preferred group of models.

More on similar lines from Noah Smith

fn1. Our profession’s favorite representative individual

90 thoughts on “The poverty of rationality

  1. One way of looking at it is a tautology. The other way of looking at it is a empirical question for neuroscience to answer. since not even the most far-gone autistic will actually optimise a complex million-dimensional utility function in their head before making each economic decision, the actual theory is that these massive computational tasks are taking place at a subconscious level. the more that is understood about how the brain makes decisions, the more falsifiable this hypothesis becomes.

  2. To quote my own favorite bon mot

    The hedonistic conception of man is that of a lightning calculator of pleasures and pains who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact. He has neither antecedent nor consequent. He is an isolated definitive human datum, in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or another. Self-imposed in elemental space, he spins symmetrically about his own spiritual axis until the parallelogram of forces bears down upon him, whereupon he follows the line of the resultant. When the force of the impact is spent, he comes to rest, a self-contained globule of desire as before.

  3. I think you push this argument that anything people can do can be interpeted as rationality too far. Its up to economists to come up with sensible stanards of economic rationality and to then test adherence to these. You don’t get anything for nothing.

    DSGE is not based on rationality if it involves excessive computational complexities which are a decion-maker cost.

    In macro the Debreu- Sonnenschien stuff says simply that the only implications of assuming individual self interest are Walras Law and homogeneity. Any aggregate excess demands that are consistent with these very weak implications are consistent with some consumer preferences. That does not suggest to me that macroeconomics is empty but that a microeconomic rationale for macrotheory is problematic.

  4. hc, I agree entirely. The point is you have to decide how tight a standard you want to include in rationality, at the price of being unable to model behavior that does not meet that standard.

  5. Gerard – obviously normal people are not actuaries of great calculating ability. And even an actuary of great calculating ability would be daunted by some of the optimisation challenges that humans might daily face. However somehow we optimise choices well enough most of the time. We also generally have the ability to learn through trial and error and to learn from the mistakes of others. We may never get it quite right but that does not mean that the search is futile or represents failure. Obviously one of the things being economised on is limited access to calculation power.

    Even if people do make a mess of things when it comes to complex choices it does not follow that choosing a bunch of people to deliberate and debate then make choices for us will in any way improve matters. In fact there are plenty of examples from history where it seems to do the opposite.

    Personally I can’t sign up to the notion that humans are highly rational. However likewise I don’t buy the idea that they are complete imbeciles. Any system we imagine from pure libertarianism, pure communism, mixed market socialism or something else is going to have an abundance of examples in which people make serious and enduring mistakes. Yearning for utopia is very human but it isn’t going to happen.

  6. I find this to be a very interesting debate Professor and I hope you write more about the role of behavioural econ in the economics profession.

    I don’t have much to contribute except that I have also noticed this oscillation between definitions. I prefer using rational in technical terms like you have (complete and transitive). What is irrational is if you take the price vector, change it to a different “frame” and behaviour changes.

    When one starts arguing the cost and benefits of assessing different price frames or “rationalizing” the default bias, I just find the story less convincing.

  7. the point is that many economic decisions are made largely on the basis of socially conditioned habits of thought and behavior, technological and environmental limitations, social, political and legal institutions that have emerged over centuries… examining how these work is more useful to understanding how the economy works more than abstract rational utility maximisations in the n-th dimension

  8. Gerard I also agree with you but I think that we need to go back further than centuries to understand the foundation of the basics of our brain/mind functioning. Although evolutionary psychology can be used as the basis for some really dodgy arguments about human behaviour, I think there is something to the idea that we did emerge and distributed ourselves over the planet as small hunter gatherer groups.

    I think that the idea of the rational individual developed from enlightenment thinking that primarily wanted to get rid of the belief in god and magic, so the philosophers of the day were not motivated to retain any of the ideas of the catholic or christian idea of human society as essentially social. But this may have been one of the good things about religion; ie the understanding that we all have an obligation to each other.

  9. TerjeP from your experience as a successful person you see that “However somehow we optimise choices well enough most of the time.”.

    From my experience and psychological knowledge, this is not the case for a great many people. A great many people do not have the capacities – because it is more complex than just intellectual capacity – to make optimim choices, even if they do have the requisite knowledge of the available options.

    The level of ‘mental illness’ seems to be is increasing, and one of the reasons for this is that the economic choices that people are being ‘forced’ to make, are simply too difficult for some of us.

  10. JQ, it seems to me several participants at the recent 2011 Lindau meeting of Nobel laureates and other distinguished guests are much more sympathetic to your list of major problems with the beliefs underlying economic policies during the past 30 to 40 years (“zombie ideas”) than Steven Williamson. The link to the session on the GFC is here.

  11. @Julie Thomas

    Ok. However it is hard to respond to your comment without some sort of tangible example or elaboration. We all know people who can be quite dysfunctional. Many of us find them in our immediate or extended families. Many of us have to accommodate and compensate for and councel against the I’ll judgement of people we care about. I know some people have difficulty with financial choices. Some people have difficulty with rules. Some don’t like dealing with public agencies. Some are trapped in a state of welfare dependence by perverse financial incentives. I can see all this. However whilst I can see people struggle with choice making I am troubled by your suggestion that choice making weakens people’s capacity for choice making. In most human endeavors practice leads to improvement. Although clearly strategic insight is also sometimes necessary.

    Also just to broaden the debate a little it seems to me that poor decisions about spending money typically have less impact on people’s lives and wellbeing than poor choices about who to sleep with, where to live, what friends to hang out with, what to eat, what to drink, what drugs to take, what arguments to have.

  12. For what it’s worth I think that the prevalence of mental health problems is due to several factors. Obviously this is not a professional opinion but I do know and have spent time with people with serious mental health problems and my mother worked her whole life in mental health and she has influenced my thinking. I would not say economic choices is a factor although difficulty making choices can be a symptom. Factors I attribute are:-

    i) welfare dependance and the loss of occupational activity
    ii) the welfare state and the consequential breakdown of community ties and economic interdependence
    iii) the consequencial breakdown of families caused by both of the above
    iv) the destruction and export of unskilled jobs through excessively generous wages and conditions regulation

  13. social welfare policies are the first, second, third and fourth top causes of mental illness according to Terje but at least he isn’t blaming the freemasons.

  14. @gerard
    That’s right Gerard. Everyone knows that there was no mental illness whatsoever before World War II, except for Rochester’s wife, whom he dealt with in a proper individually rational and self-interested manner by locking in an attic.

  15. @TerjeP

    Actually making decisions can impair your ability to make further decisions if you don’t get respite (see article linked below). Apparently successful people minimise the non-critical decisions they have to make so as to avoid this problem (e.g always eat the same foods, wear the same clothes etc.). If you are poor and have to continually optimise your spending and make trade-offs, you will end up making bad decisions and suffer stress and perhaps mental illness. Come to think of it if you are on welfare you are probably poor and hence in that boat. Could it be that poverty and not welfare is the problem?

  16. When you get such posts from Terje as:

    i) welfare dependance and the loss of occupational activity
    ii) the welfare state and the consequential breakdown of community ties and economic interdependence
    iii) the consequencial breakdown of families caused by both of the above
    iv) the destruction and export of unskilled jobs through excessively generous wages and conditions regulation

    Just invert his claims to reveal the reality he has misconstrued and add in the missing third – the underlying cause he has ignored.

    1 the loss of occupational activity (due to capitalism) then the welfare state
    2 the breakdown of economic interdependence (due to capitalism) then the consequential breakdown of community ties and the welfare state
    3 the breakdown of families due to the above (due to capitalism).
    4 the destruction of and exports of jobs (due to capitalism) and of course the usual song about generous wages and democratic regulations.

    Terje blames the welfare state, wages and regulations for: mental health problems
    job losses, family breakdown. He should be blaming cartels, monopolies, unregulated commercial practices, and anti-social profiteering generally.

    Unfortunately for Terge, the welfare state, wages, and regulations are needed to prevent and alleviate these social problems, and soften the blows of capitalism until time runs out.

  17. Chris – just for the record I’m ignoring you as a general rule because I don’t find you very engaging. I didn’t want you to die wondering.

  18. Matt – what you say regarding respite rings true. Successful managers I have observed avoid to spend too much decision making by delegating, deciding quickly and prioritising. What you say in this regard makes sense. However I still think making decisions is more likely than not to strengthen decision making and decision making strategies (eg don’t sweat the small stuff).

  19. TerjeP I’m not sure what sort of examples or elaborations you’d like. Feel free to ask for specific clarifications; I am willing to anwer relevant personal questions as honestly as I can.

    I don’t think I said that choice making weakens people’s ability to make choices. The way I see it is that the mental effort that it takes some of us to make choices, as well as making us very tired – thanks Matt – but it also takes away from our ability to use our brain in other ways that would be of more benefit – like reading to our kids.

    If we are in a functional family, we may have some help in these areas. Perhaps the family would be the basis for a more effective economic unit rather than the individual. It is the idea of the autonomous rational individual as the foundation for understanding human behaviour that strikes me as a fundamental problem.

    You are perfectly right that our economic decisions are only one of the difficulties that some people have. that determine our success in life; we have too much freedom, too much choice in lots of areas. We can go there also but I think you minimise the problems of making choices. If one is on a fixed, barely adequate income, every choice in the supermarket takes a lot of mental effort and decisions about what needs to be bought this week and what can wait until next week.

    If one doesn’t have any savings and lives from week to week, there are significant consequences if one makes the wrong choice. Having once been a single parent in this situation I do know how difficult it is. I think that poverty has a magnifier effect on any other psychological problem one has.

  20. My personal experience is that welfare of the kind that was available in the 80’s, where single parents were encouraged to look after their children first, was what enabled me to overcome the problem I faced from the poor life choices I made.

    It was a leftie social worker in the DSS – I think they were Dept of Social Security then – who pointed out to me that I had a responsibility to contribute to society in return for my single parent benefit. She encouraged me to go to uni and the success that I had there was something I had never experienced before. I had never been successful at anything else in my life. But it also provided me with the knowledge and skills to not only save myself, but to bring up 3 kids – despite the extra difficulties that having an alcoholic ex-partner imposed. They are all working full time and paying tax. One of them pays quite a lot.

    The way I understand it, that type of care is not available to single parents now. Guess I was lucky.

  21. Rationality depends on what measure is being used. It is quite rational for a person in a small community to adopt group think in order to remain a part of that community as ostracism is the likely outcome for a non-conformist thinker. Ostracism in turn means that small kindnesses and help will be withheld by other community members. In a large community this is not relevant and allows for greater freedoms in beliefs and actions. The threat of ostracism is not an economic outcome and neither are the small favours that can spring from goodwill through a shared system of beliefs. To me this suggests that rationality needs to be looked at in the group context. What looks rational in one context will look ridiculous in another. In fact many decisions are made in an emotional context because economics is not the primary driver.

  22. I agree with the sentiments expressed here regarding overwhelming choices. I like the idea of the right not to choose. A recent example of this is the no-frills superannuation scheme. Most people have neither the time nor the inclination to think about these things, and default vanilla accounts without fees sound like a good innovation. I’m sure many people would never change their account from no-frills if this was the path of least resistance. If people don’t know or don’t care about a particular subject, the default “choice they make when they’re not making a choice” should be set to something sensible, unobtrusive and low risk.

    Just on that though, why do current rules force people to “opt in” to after-death organ donation and “opt out” of telemarketing cold calls?

  23. I really don’t see how you can blame welfare for the break-up of the family; there are so many other factors throughout the last century that have contributed to that. What about the effect that war has on men and their ability to be effective parents? I can find links if you’d like; there was something on the ABC about it last week. Please excuse me though, because where I live I don’t have ‘real’ broadband and that extra download time makes it less rewarding to go looking for evidence.

    I do know that my maternal grandfather was bedridden after WW1 for the rest of his life, and effectively reduced that family’s economic success.

    What about the decline of the extended family and the emphasis on the nuclear family? Surely that has had a big effect on the breakup of families? Another old adage that I think is really good is; ‘it takes a whole village to raise a child’. Two people do not provide enough of a range of adult role models. In some cases, it could be that an aunty is closer to the child in ‘temperament’ and therefore, she lives in the ‘village’, the child will benefit from this interaction.

    I believe that the libertarian doesn’t see any problem with expecting units of labour to move to where ever there is work. It seems to me, from my bias, that this ‘enforced’ mobility has contributed significantly to the break-up of the family. Not welfare!

  24. @Chris Warren
    Stop ruining John Quiggin’s blog mate. You’re really abusing the absence of our moderator. Every time someone says something against your politics you respond with a personal attack. It’s just not necessary. I don’t agree with much of what TerjeP says either, but a blog where everyone agreed would be pretty boring. How about you try just politely debating him on the issues?

  25. Julie – I don’t think there is any problem with people following the jobs. That is how society has been fornthousands of years and jobs matter both in terms of economic success but also in terms of avoiding social distinction. That said I think the cost of moving is made excessive by stamp duty on property (I call it the moving tax) and moving the jobs to the people is made complicated by some zoning restrictions and by wage regulation. For instance if you live in a remote community many jobs are unlikely to come to you unless you can offer your services at a cheaper rate than those in urban areas. Wage regulation restricts this means to job expansion. Mean while China is booming off of the fact that it has been able to compete on wage rates and in so doing it is building a pathway to a high income future for it’s people. Some Aussies are job snobs but our wage regulators are the real job snobs. They would rather low pay work didn’t exist even if the consequence is higher unemployment and idle citizens. At a minimum we ought to set the minimum wage by region rather than nationally.

  26. TerjeP Some people get better at making some types of decisions with practice, I’d guess, but this is simply not the case for all people. Also your manager is making decisions in a familiar environment and about things he or she will understand and also there will be some way of measuring the success of the decision. None of these things are applicable for my welfare mum.

    Rational decision making and behaviour is not the norm for human beings. It is something that comes from socialisation and your system offers nothing in the way of ideas about how to socialise people in a way that will maximise their ability to think rationally. It may be something we can aim for in the future but your simplistic philosophy and economic system will only widen the gap between the rational and the losers.

  27. Julie – I think reading to kids is enormously important. However I’m not buying the notion that economic liberalism will overwhelm people with so many choices that they can’t read to their kids. Of far more significance is whether the parent knows the benefit of reading to their kids and secondly if they value education and literacy.

  28. None of these things are applicable for my welfare mum.

    That’s sounds like rubbish. Lot’s of managers operate in areas where understanding is limited. And mothers are quite capable on the whole at making reasonably rational choices about the allocation of time and resources. We would be extinct if they weren’t.

    Do you favour the welfare quarantining started in NT under the Howard government and continued under the current government? It is basically predicated on the same notion as what you are on about. The concept is that welfare recipients can’t cope with the difficulty of make purchasing decisions and need government agents to decide these things for them.

  29. TerjeP I’ve no capacity for understanding economic policy, sorry. I can’t respond to the problems like stamp duty that you introduce. Pretty much non political; just a bleeding heart with some psychology a desire to understand people, and a biased belief that the ideas of free market capitalism are taking our society in the wrong direction.

    You say that you don’t see the problem with people following jobs despite the really realy important reason I gave you; that it breaks up that most important economic unit, the family.
    the family is the fundamental unit of society and your system does not recognise that. I’m not sure that people have been moving as nuclear families for thousands of years. Do you have any particular examples of this?

    I’d have thought that people only began moving for work, since the industrial revolution. Didn’t somebody else say that earler on this thread? It seems to me that for most of human history – which was unrecorded for sure so it’s all pretty much speculation – we moved as family groups.

    I’d guess again that you wouldn’t understand the extra burden on the poor that comes from moving to a new location. I’m not talking about people who have to pay extra stamp duty. For the people on the dole who are being accused of ‘job snobbery’, excessive stamp duty is the least of their problems.

    Kids who move schools do worse on a number of measures, than those with a stable educational history. If you move away from a family or community where you already have social support, you lose things like free babysitting or a mate who can fix your car.

    Anxiety levels and/or depression are exacerabated in some people who are not good at making friends and fitting in with new social groups. When a parent is anxious they are less able to care for their children. The children also lose all their links to a community and while it might be exciting for some kids, others just don’t cope.

    I also think that there is a problem with your idea of trade. It seems to me that the way humans traded prior to the introduction of ‘rational man’ and capitalism was more complex than libertarianism recognises; it was more than a simple exchange of goods. If you look at the way the Australian Indigenous trade, there apparently was a very strong reciprocal obligation on each party involved.

  30. TerjeP is right about stamp duty – it is a regressive tax and should be replaced with a land tax.

    Having said that, the people most affected by it by far are those in the privileged position of being able to afford to buy a home.

  31. TerjeP the reduction of reading time was only one way in which the burden of choice affects an ordinary person’s ability to do other more important things with their life. I would need to write an essay and provide you with case studies to fully explain the way that too much choice is not good for most people. Of course, your thrive on choice, you love freedom, but you are not the default human being.

  32. @Dan

    Land tax makes more sense. However in terms of those affected I think you have neglected to include those who would buy a home if not for stamp duty.

  33. TerjeP I’ve no capacity for understanding economic policy, sorry.

    That’s odd. You have no capacity for understanding economic policy and yet you wish to debate the merits of one policy position over another. You have no capacity for understanding economic policy and yet you somehow conclude that neoliberal economic policy is the wrong policy mix. That seems like an incredibly judgmental position to take. Surely you should seek to understand first and judge later. I’d suggest you either stay quite on issues of economic policy or else develop some capacity in this area (preferably the later). Maybe if the choice between alternate economic policies is not within your capacity you should let other people make these decisions for you. After all this is the advise you were giving earlier regarding people with limited capacity.

  34. p.s. Julie – do you think forcing people to vote is harsh. After all choices are so hard to make and people have limited rationality.

  35. @Dan

    How is stamp duty any more regressive than other taxes. Surely this is only a matter of how it is applied – ie the spread of brackets within which each rate applies, and the increase in the rate, bracket by bracket.

    It is always preferable to have the tax base as broad as possible, so stamp duty is an entirely suitable tax, and any regressive nature can be fixed by government. Presumably we do not have a progressive stamp duty because of politics.

  36. Chris – stamp duty is regressive because is it distortionary – it discourages economic behaviour that it isn’t at all clear we ought to be discouraging, to wit: moving house (okay, it probably doesn’t meet the technical definition of regressive).

    A land tax could easily raise the same or more revenue without that drawback.

  37. @Terje: “However in terms of those affected I think you have neglected to include those who would buy a home if not for stamp duty.”

    Ah yes! Those five.

  38. #TerjeP It is interesting how you have deliberately misunderstood arguments about the effects of being forced into too many decisions and how these affect people’s ability to make good decisions. Your sarcastic remarks and facetious attitude deserve censure.

    Moving people from their communities and families to satisfy labour needs increases the pressure on those families, increases the number of things that they have to optimise and causes them to make poorer decisions (or actually to avoid decisions). Decisions avoided include decisions to take up opportunities (all opportunities come with some risk). Pursuing economic policies that exacerbate that problem is likely to lead to worse outcomes for society and the economy. The solution is not to dehumanise, humiliate and disenfranchise people through quarantining or income, removal of compulsory voting (note that this would add a decision not remove one) or making snide remarks about people’s contribution to a debate.

    The point is that people do not make decisions by rational optimisation, that any economic theory based on that will produce poor models of behaviour and hence any economic structure based on those models will not be fit for the purpose of making the population secure and content. Of course if you believe the economy is for some other purpose then we can discuss that and see what costs in health care, divorce, crime and mental illness the model is willing to bear to achieve whatever is goals may be.

  39. Yes – distortionary, not regressive (if properly implemented).

    However with a reasonable threshold (as in the UK @ 125k pounds), the distortion can be restricted to higher income levels, and only gets paid once ie when there is a transaction.

    I have not seen a reasonable proposal for a land tax, so I doubt whether it has any greater efficiency. There is a large debunked literature on the well debunked Henry Georgeist land-value tax. So what is the guarantee that land tax could easily raise money without the same or equal drawback?

  40. TerjeP Well done. You functioned in a non-judgemental and apparently reasonable way for some time. I am so irrational that I didn’t even realise that I wanted to debate the merits of one policy issue over another. I didn’t even understand that we were debating a policy. I thought the ‘idscussion’ was to do with the poverty of rationality.

    And you have clearly demonstrated again, as if I needed any more evidence, that you are prone to making pejorative value judgements about people. Do you think that is rational? And your sarcasm is not that impressive, you know.

    But I wonder why you pretended to be interested in what I had to say. What did you hope to gain? What was your motivation?

    Or if you want to start again with your last question. How do you define ‘force’? The way libertarians usually define it depends on the context, very slippery you are about this behaviour. How do you define ‘harsh’. Do you need a break? That last ps post was a bit dodgy you know. Seemed a bit desperate in some way.

  41. Matt – I don’t deliberately misunderstand anybody. I just articulate what I see as the implications of what they say. If I get it wrong they can correct me.

    I’m not denying there are pressures associated with moving. However I don’t think moving for a job is a bad thing. Obviously people need to make the decision according to their circumstances. I think people should be free to make these decisions. I’m surely not suggesting that people be denied the freedom to make such choices. This isn’t the soviet union.

  42. I may have expressed myself a little misleadingly; my point was not that such a thing would be easily implemented, but rather that there is no reason that such a policy, once implemented, would lead to lower government revenue (possibly the opposite).

    As for the “paid once” thing – well, that’s just the problem with it. Even if you only tax above a certain threshold, what’s the rationale for this sort of transactional tax? It seems to be a hangover of bureaucratic inertia rather than actual good policy.

    In any event, weren’t you advocating keeping the tax base as broad as possible a few posts up? I don’t have a strong view on the matter, just as long as tax policy overall is powerfully redistributive, but I’m not sure what your position is.

  43. TerjaP@47: “I think people should be free to make these decisions… This isn’t the soviet union.” Implication being that the only force that acts to constrain choice is government? That certainly flies in the face of reality.

  44. Julie – my sarcasm was intended to make you think not to bring you down. Please don’t be precious. And you were actually discussing economic policy choices when you said that my preferred economic system would widen the gap between the rational and the irrational. And you have made other comments about capitalism and neoliberalism.

  45. TerjeP Sure moving can be a good thing if there is enough support for the family. The problem is that with your philosophy toward the poor and less able, why would your minimal safety net government bother with policies to provide them with this support?

  46. TerjeP Whatever, I’m not precious, I’m taking my medication and working on my self-development and I’ll be right mate.

    Much potential for misunderstanding between a rational man and an irrational woman, though.

  47. Julie – by force I generally mean make somebody do something via the application of physical force or the threat of physical force. Obviously I was simplifying a little because we are not forced to vote. We are compelled to mark our name of at the polling both with the threat of a fine. If we refuse to pay the fine we may be forced to spend time in a cage. So the force is not applied directly to make us vote however it is still very real. Certainly we are told in government advertising that voting is compulsory. So I think my short hand use of the term force was fair enough. And I’d like to know what you think of people being forced to make such a choice (ie to vote) when many clearly lack the capacity to make an informed or wise choice.

  48. … the modern idea of a function as a mapping between sets …

    You’re out of date. The modern idea of a function is a set of ordered pairs, e.g. {(0,0), 1,1), (2,4), (3,9), …} is the set describing the function of squares of non-negative integers.

    … We can observe economic agents behaving irrationally, so what is all this rational agent stuff about? Answer: If you think you are observing irrational behavior, you just have the wrong model. Think harder.

    This is not an adequate answer, because it omits the possibility that there may be no solutions in the accessible address space, e.g. thinking harder won’t find a rational square root of two, and (more to the point) some things are inherently uncomputable and/or undecidable. While it would not be a surprise if all the questions economics addresses turned out to have “rational” meanings (in this sense), neither would it be a surprise if some didn’t and if “looking harder” turned out to be no way to proceed. After all, it was also Cantor who first showed the way to just such things, with his method of diagonalisation.

    I would suggest you try diagonalising to see if you can find something of this sort that cannot be adequately represented as optimisation – you might well find that there was something. Even if it turned out to be overly artificial, the limits you found would indicate the limits of your subject area.

  49. PML – what if I define the following function:-

    f(x,y) = x + y

    It does not seem to be a set of ordered pairs. It seems to be a mapping from one set (cartesian plane) to another set (real number set).

  50. TerjeP, PML was talking about functions of a single variable. For functions dependent on n variables, define a set of ordered (n+1)-lets, as in
    {(x,y,…,z,f(x,y,…,z)) for all x, y,…,z in the domain}

  51. PML, I’m trying to make life easy for the readers here. The definition I gave was the one introduced by Cantor, and still the one that’s most commonly used. The ordered pair characterization is equivalent, and is a bit more “modern” in style, though the appeal of that kind of modernity peaked a few decades ago, I think.

    On your second point, economists spend a lot of time worrying about lexicographic orderings and similar, which create technical difficulties of the kind you describe. My own view is that the data set is always finite, so there is no real need for such worry.

  52. Terje, I agree with you when you say that any system will suffer from behavioural anomalies.

    However, departures from rationality is not just about poor decisions about spending money as you say.

    This paper shows the relevance of that behavioural stuff to a topic I’m sure that your fond of. By the way, 1930 cites on Google Scholar should indicate that I didn’t just pull it out of some institution that publishes material which may or may not confirm my default bias (IPA for some).

    Also, I reckon your link between mental health and welfare dependence is a huge call. I know that you based this on your own experiences but any peer-reviewed papers to support your claim is welcome.

  53. W – The paper is behind paywall. I’m not likely to buy it blind so if you want to enter it into the discussion how about your summary of what it says.

  54. @sam

    I’ve got a lot of time for PML but on this occasion he was being pedantic (as JQ makes plane). I was merely returning the favour. 😉

  55. Sorry Terje, I didn’t mean that, I am used to being logged in through the uni website.

    The endowment effect is summarized here

    Some quotes relevant to Coase theorem:

    “According to the Coase theorem, the allocation of resources to individuals
    who can bargain and transact at no cost should be independent of initial property rights. However, if the marginal rate of substitution between one good and another is affected by endowment, then the individual who is assigned the property right to a good will be more likely to retain it.”


    “The existence of endowment effects reduces the gains from trade.
    In comparison with a world in which preferences are independent of
    endowment, the existence of loss aversion produces an inertia in the
    economy because potential traders are more reluctant to trade than is
    conventionally assumed. This is not to say that Pareto-optimal trades
    will not take place. Rather, there are simply fewer mutually advantageous
    exchanges possible, and so the volume of trade is lower than it
    otherwise would be.”

    What I do not claim is that the government should wipe our brains of the endowment effect or that the government should intervene and la la slippery slope to the Soviets.

    What I do suggest is the endowment effect does call into question the efficacy of “Define the property rights, let Coase sort em out” approaches.

  56. from Wikkpedia on rationality:

    if one accepts a model in which benefiting the group is optimal, then purely selfish behavior is deemed irrational. It is thus meaningless to assert rationality without also specifying the background model assumptions describing how the problem is framed and formulated.

    Some people increase their decision making capacity by limiting the factors included in the frame for rational decision. By kicking out “a benefit to a group” or “hurting others” or “empathy” factor you get conservative/neoliberal rationality.

  57. @Dan

    Tax is fraught with such problems. A land tax and stamp duty can be argued but only with some specifics. In the ACT “land tax” is really a landlords tax payable if a investment property is rented. It is different in other jurisdictions. Whether a tax is progressive or regressive cannot be divined from the name of a tax. You need to know its structure.

    I do not see any point in abolishing stamp duty and replacing it with land tax (unspecified) – which some have suggested.

    Stamp duty is paid even if primary residences are sold (except when first home buyers concession applies). This means that abolishing stamp duty benefits the rich more than the poor because the rich have invested large amounts in mansions as primary residences and scoop up the capital gain.

    So it seems, abolishing stamp duty is a typical policy of right-wing elements.

  58. @Chris, #16

    Compensate if necessary, at least transitionally. A broad-based land tax is a more sensible, frictionless tax, and of course the majority of houses aren’t mansions; the majority of people aren’t rich.

    I should add that you won’t have a great deal of trouble convincing me that the income tax that the rich pay could be cranked up to net social benefit.

  59. Stamp duty is a tax on transactions and can act as a disincentive to trade. Land tax, like council rates, is a value tax and as such is more fair – thresholds can be applied.

  60. @W
    Or you can optimize it even more when faced with lack of money to feed, house and educate your family. It would be all good without externalities such as Great Recession, Which Julie points out how it can affect your decision making process being overwhelmed by choices. Increase of divorces during economic hardship is an example of increased optimizing (wrong decisions) forced by externality. Fairness diminish when faced with economic hardship.
    My point was that a person has a defined capacity for rationality and optimizing is enforced between different groups of life decisions. Different groups like making income and political preference, choice of friends etc.. Having to expand one group’s rationality forces the optimization of another less essential group.
    Increased optimization of less essential decisions, like political decisions, is forced upon population during persistent recessions. Increased optimization means more conservative rationality. Longer the recession/ depression persist bigger the chance that conservative will win the election. Up to a point and then switches to reactionary opposition. Isn’t it that how during the Great Depression you got two opposites: fascism and communism? Individualism and collectivism.

  61. A spam plug for cialis made it past the blocker. How did that happen? Admittedly, it was in Spanish, but I’m still surprised.

  62. Terje That explanation of ‘force’ is a poverty stricken definition and it allows you use the term in any way you want so as to win a point.

    For example, you will say that the workers weren’t forced by the mill owners to work in such lousy conditions but you are able to say that we are forced to vote. Does that not strike you as an inconsistent and a self-serving way of thinking?

    First, my view is that compulsory voting functions as one of those social mores that a lot of philosophers consider essential to a decent and stable society. Social mores, particularly ones that give us a reason to feel ‘equal’, psychologically bind us together as a society. Compulsory voting gives us something very significant to feel ‘together’ about, whether we are whinging about it or loving it.

    Secondly, as an irrational, irreverent and creative individual, I revel in finding ways to outwit the state when I consider it to be too bossy. I live right in conservative party heartland, so it doesn’t matter a hoot who I vote for. I had managed to avoid registering to vote until I was in my 40’s. Then I was ‘forced’ to register, by a very nice man at my door, who didn’t threaten me with the application of physical force; just a fine, he said.

    On my income, a fine is a significant threat but if I felt strongly enough about my right not to vote, I would pay the fine each year. I ignore the law on marijuana smoking also, and I note that I have seen mention of this illegal activity by known libertarians on Catallaxy, and you didn’t condem it there so don’t go all sanctimonious on me.

    But, because of my education, I was able to develop meta cognition and now I know that going out is good for me; to become less anxious, I now know that I need to constantly battle the tendency, so I conceptualise the task of getting out of the house and going to the polling place as a personal challenge and character building.

    Also, I am only ‘forced’ to go to the booth. I am free to be creative there by voting for Spinoza, if I want. I recommend Spinoza to you as a philosopher worth reading. He has some ideas on the state. His credibility for me, comes from the way he lived his life. He was not a hypocrite.

  63. Terje I read that, in your personal experience welfare was a negative factor in at least one case. The fact that my experience is different, surely suggests that you might look for the factors – psychological, social or chance, that mediate this difference rather than dismissing my positive experience as less significant than your negative experience.

    I totally agree that in some cases welfare without any concomitant obligation to society can and does have negative outcomes. Howard’s attempt to impose ‘mutual obligation’, was derided by the welfare class, not because they didn’t like the idea but because they didn’t trust a conservative to have their best interests at heart. That was the understanding I had at the time. The answer is not to do away with welfare but to use it as a tool to improve people’s ability to participate.

    I’ll give you an example of how lack of welfare leads to negative personal outcomes. I believe that if there had been welfare back in the 50’s and 60’s, my mother would have been able to be a stay at home mum and look after me and my brother and sister. Because my father was in and out of psychiatric hospitals for a number of years, before he did kill himself, my mother was the one who had to run the printing business, they had.

    She was not a good business person, unlike my father, who in his good periods – he was bi-polar – functioned pretty well. To feed and keep us, she worked really really long hours for very little profit and we were left to fend for ourselves for most of the day and up to 10 oclock at night, for years.

    My father was ok until I was about 8 or 9 when he went seriously downhill. So during the teenage years, there was no-one there for me, to help me to make good choices in the area of a career, and a suitable partner etc.

  64. @rog

    A stamp duty is a disincentive to some trade but creates a incentive to trade elsewhere, according to various signals from the community – queues in outpatients departments, waiting lists for housing etc. As funds are now available to meet this unsatisfied demand, the net increase in utility is positive.

    Land tax (in the ACT) is really a income tax, in that it falls only on the extra income a landlord obtains. There are also ACT ‘betterment’ taxes on rezoning. These both create the same disincentive to produce and rent out housing.

    All taxes that are conducive to thresholds, can be fair and equitable.

    So there seems no reason to prefer land tax to stamp duty. Just ensure the tax base is a broad as possible and thresholds are applied fairly.

    However, if we did not have such a huge need for the welfare and military state, it may be possible to eliminate all taxation other than a well structured progressive tax on economic profits.

  65. Terje That explanation of ‘force’ is a poverty stricken definition and it allows you use the term in any way you want so as to win a point.
    For example, you will say that the workers weren’t forced by the mill owners to work in such lousy conditions but you are able to say that we are forced to vote. Does that not strike you as an inconsistent and a self-serving way of thinking?

    There are other definitions for force. I’m just giving you the definition I intend when I discuss political philosophy.

    You support mandatory voting and have a justification for doing so. I support an increase in economic freedom. You lament economic freedom because it offers too much choice. May I suggest that your agenda is actually nothing more than soft socialism dressed up. The issue for you isn’t about people’s capacity to make choices but the economic system you prefer and the mode through which people make choices. You don’t mind people choosing laws and politicians but they can’t cope with what you see as the excessive choice of products at the supermarket.

  66. @Terje: “May I suggest that your agenda is actually nothing more than soft socialism dressed up.” If you mean social democracy, I think you’ll find that most people here, and most Australians, are social democrats of one stripe or another. On equity/ethical grounds and also because they see empirical evidence for social democracies as being more economically and socially resilient.

    “…but they can’t cope with what you see as the excessive choice of products at the supermarket.” No need to trivialise social democratic concerns. If that’s what you think most social democrats lose sleep over, you’ve failed terribly to understand the way economic power works and is exercised. Try reading Myrdal – he won the Nobel the same year as Hayek…

  67. @Julie Thomas

    There is no more force involved in compulsory elections than the inherent force involved in wearing clothes and road rules. Only capitalist tricksters associate this with the force involved in the social power of Capital. They do this to blur criticism.

    If the acts of parliament are applied compulsorily onto everyone (such as conscription), then the processes electing them need to be as representative as possible.

    Once a capitalist has Capital, and a regime of property rights, they can drive society into the ditch and force more and more people into penury – as they make themselves rich.

    While we should accept the force of having to choose based on our income, this is conditional on a prior requirement that everyone’s income truely reflects their productivity.

    Unfortunately this requirement does not exist – Capitalism is based on forced determination of wages (or in fact wage denial under Howard/Harper), but a pretended freedom thereafter.

    Getting logic out of capitalists is harder than extracting blood from stones.

  68. I am surprised nobody has mentioned the work of probable future Nobel Prize winner Richard Thaler here. My understanding is that he regards much of human behavior as irrational in the weak sense that one has to write very unusual utility functions (e.g. non-monotonicity, hyperbolic discounting, including social norms etc) to be able to describe it as optimization.

    Drug and alcohol abuse, obesity, drink driving, problem gambling, most crime, some poverty and plenty of other social ills probably fall into this category. If Thaler’s behavioral view is correct it forms a very powerful counterargument to the libertarian view sometimes expressed here.

    Thaler’s policy advice is that the best way to manage these ills is to allow people a choice, but try to ‘nudge’ them in the right direction. For example (as Sam mentioned) make people opt out for organ donation rather than opt in, or place the unhealthy food high up and away from easy reach at the supermarket.

  69. markets = fear and greed.

    rational behaviour does not get a look in.

    the logic of perpetual gain drives the process.

    and “bulldust baffles brains” = mode of operation.

    which leaves the simple minded well ahead.

    “buyer beware” .

    as in

    i’m not pleased to meet you.
    you have many names
    i’m not confused at all
    by the nature of your games.

  70. Having read Williamson’s screed, I was gobsmacked by someone who could claim, without apparently experiencing any cognitive dissonance, both that:
    “Quiggin thinks – and he would be correct – that most economists have the opinion that unions perform no useful economic role in modern society. While one could argue that unions played a crucial early role in the adoption of humane work practices and workplace safety, in most developed economies there is a well established structure of laws and enforcement that deals effectively with safety on the job, workplace harassment, and other issues. A good case can be made that unions act mainly to stifle competition, to inhibit innovation, and to slow technological advance” (page 18)
    and that:
    “The tools of modern finance and macroeconomics are not the instruments of conservative elements in society, serving only to bludgeon the working class. These in fact are the tools of science, and as such they can be used effectively by liberals and conservatives alike to make the world a better place.” (p23)

    Maybe he means Australian Liberals/Conservatives and missed a “for Liberal conservatives” at the end of the last sentence. If mounting a full-on case for the uselessness of unions and claiming that “laws and enforcement” to protect workers would somehow exist without any organised working class political/economic pressure is not intellectually “bludgeoning the working class” I’m not sure what is. He ought to take a look at the workplace death statistics under Howard/Abbott.

  71. In talking about rationality and various models of self-interest, most obstinate defenders, like our friend, Williamson, engage in bait and switch. The model they start off with does, typically, have refutable assumptions, but when someone points out that both the assumptions and the implications have been long refuted by evidence, they then quickly switch to the more metaphysical irrefutable and therefore immune and vacuous form. However, it is never that vacuous form that they use to attempt to navigate the world precisely because it says nothing about the world, which is why it is immune to refutation.
    The bon mot covers this rapid switching behaviour well. So basically they always operate with two models. The one they use, and the useless one they are willing to defend, when that first model is under attack.
    Entertaining as this behaviour might be, the first or even second time encountered, people like Williamson ought to make a choice. Do they want to be taken seriously as academics, or even as rational beings, or do they want to continue to behave more like a character one might more appropriately expect to find in a Lewis Carroll piece of literary nonsense?

  72. Freelander :Entertaining as this behaviour might be, the first or even second time encountered, people like Williamson ought to make a choice. Do they want to be taken seriously as academics, or even as rational beings, or do they want to continue to behave more like a character one might more appropriately expect to find in a Lewis Carroll piece of literary nonsense?

    I think they want us to believe that what they say three times is true.

  73. Economics is, in my opinion, like the law. It is what you make of it. You can produce all the lovely theorems and equations you like, you can produce, or fabricate all the statistics (damned statistics!) you desire, but it remains a poor pseudo-science, particularly when it pretends to exhibit ‘scientific rigour’. Economic theory depends far more on the economist’s ideology, personal preferences and psychology than on ‘science’. And how could it be otherwise? Even in physics our knowledge may have greatly increased, but so too has our ignorance. I prefer political economy, where the researcher’s ideology is front and centre and economic formulae and theorems are bedded in real life, real politics, real sociology and real human interaction. The quote above, that ‘..most economists have the opinion that unions serve no useful role..’ is not science, nor even pseudo-science. It is pure ideology, founded in psychology. You can see exactly why the Friedmanite catastrophe, that has caused such destruction and human suffering, was first applied at the point of a bayonet and through the murder of thousands of just such human beings, who, for the Right, had no ‘useful role’ but to fill disused mine shafts.

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